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In Tri-State Signature Homes Ltd, Re, 2017 ABQB 587, the Alberta Court of Queen’s Bench ruled that the statutory stay of proceedings under the Bankruptcy and Insolvency Act (BIA) does not prevent a creditor of the insolvent person from demanding payment under a letter of credit.

The insolvent debtors, which together used the name “Tri-State”, had previously authorized Westpoint Capital Corporation (“Westpoint”) to issue irrevocable stand-by letters of credit to one of Tri-State’s creditors, Star Prebuilt Homes Ltd. (“Star”). After Tri-State became insolvent and had sought to restructure its affairs by filing a notice of intention to make a proposal, a stay of proceedings was automatically imposed under s. 69.1 of the BIA, which provides the following:

“[…] on the filing of a proposal under subsection 62(1) in respect of an insolvent person,

(a) no creditor has any remedy against the insolvent person or the insolvent person’s property, or shall commence or continue any action, execution or other proceeding for the recovery of a claim provable in bankruptcy until the trustee has been discharged or the insolvent person becomes bankrupt;”

Tri-State argued that the creditor’s demand for payment under the letters of credit would constitute commencing or continuing “other proceeding[s] for the recovery of a claim provable in bankruptcy” and would therefore be prevented by the BIA stay of proceedings pursuant to s. 69.1. The Court referred to the decision in Meridian Developments Inc. v. Toronto Dominion Bank, 1984 CarswellAlta 259 as potential support for the argument advanced by Tri-State. Meridian Developments provides that “payment of a letter of credit drawn on the account of an insolvent company could well come within the meaning of the word “proceeding” […].”

The Court was not convinced by Tri-State’s argument and rejected Tri-State’s application seeking to enforce the stay of proceeding as against Star and the letter of credit. The Court referred to several factors in arriving at this decision, including the fact that none of Tri-State’s other creditors would be prejudiced by Star demanding payment from Westpoint, as well as a clause within the letters of credit that expressly states that Star would have the right to draw down the full amount of the letters of credit regardless of any BIA proceedings that occur. However, the main reason for denying the application was that “Star’s demand for payment under the letters of credit, if it is a proceeding at all, is a proceeding for the recovery of an obligation owed to it by Westpoint. It is not a proceeding taken against Tri-State or its assets. For that reason it is not properly characterized as a proceeding for the recovery of a claim provable in bankruptcy.”

This decision affirms that the holder of a letter of credit will retain their ability to demand payment from the issuer of such letter despite the statutory stay of proceedings in an insolvency restructuring.